Monday, March 3, 2014

What ails State Bank of India?

SBI owns many of its 15,000 branches and a few thousand residential flats across the country, making it among the largest real-estate rich outfits, after defence, Indian Railways and LIC. Photo: Pradeep Gaur/Mint

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The biggest challenge before SBI, at this point, is monitoring its bad assets

For the past one year, the State Bank of India (SBI) has been showing a drop in both operating as well as net profits in every quarter and a rise in bad assets. Its gross non-performing assets (NPAs) rose to 5.73% of total loans in the December quarter, up from 4.75% in March; after setting aside money, the net NPAs have risen to 3.23% in December from 2.10% in March. What ails the nation’s largest lender?

There are some cosmetic changes such as insurance cover for all export and small loans, air-conditioning of all branches, and taming of the aggressive trade unions, but fundamentally nothing has changed in the bank. Its expenses have been on the rise while there is no commensurate rise in its income—both interest income as well as fees. There is also a structural issue that could be harming the bank. Following the recommendations of consultancy firm McKinsey and Co., SBI has de-layered its administrative structure. Its four managing directors looking after most of the bank’s businesses and nine deputy managing directors report to the chairman. This makes the chairman an operational head with very little time for lateral thinking and strategy.

Besides, through a change made about two-and-a-half years ago, the chairman is also now a member of SBI’s asset liability management committee (Alco), which takes a call on deposit and loan rates. Since the chairman has the last word on such issues, ideally he should stay away from Alco meetings, allowing his colleagues to have frank discussions. Many in the bank believe that a sharp rise in the bank’s short-term deposit rates, done at the chairman’s insistence, has affected its net interest income and consequently net interest margin, a key parameter of profitability.

There are many ways that SBI can cut costs. For instance, it has 14 stationery departments to supply A4 size papers, ball pens, pins and clips to 14 circles of the bank. These departments employ several hundred workers. Does a bank need such a division when a Flipkart.com can take care of such needs? Similarly, it has 14 processing centres to scrutinize new depositors’ forms, employing at least a couple of thousand people. It’s a mystery why SBI needs data processing centres for every circle when most foreign and new private banks run one centre to process such data across India.

Yet another cost centre is the currency chests that SBI has historically been managing on behalf of the Reserve Bank of India. Of the 4,200 currency chests across India, SBI runs 2,200 or 52% of them while its market share in loans and deposits is around 17%. Assuming that each currency chest on average needs about six armed guards, more than 13,000 such armed guards are on the payroll of the bank. While cash management is a critical activity for the banker to the nation, surely there are modern cash replenishment and logistics alternatives that can minimize use of guards and space.

Finally, SBI owns many of its 15,000 branches and a few thousand residential flats across the country, making it among the largest real-estate rich outfits, after defence, Indian Railways and Life Insurance Corp. of India. What prevents it from floating a real estate arm, in partnership with a real estate management firm? This will result in savings of several hundred crores every year through efficient negotiations with the landlords and free up resources for their core job of business development.

Another area where the bank must look into is its 41,000-odd ATM network for the group. In November, the SBI group roughly accounted for 41% of the 380 million outstanding debit cards (and 45% of the total 530 million transactions) but its share in the ATM network was far less, at 30%. As a result, the bank’s customers use other banks’ ATMs for withdrawal of money. Under norms, up to five such transactions are free. While the customers make free transaction at other banks’ ATMs, SBI needs to pay Rs.18 per transaction. Indeed, SBI also makes some money while other banks’ customers use its ATMs but that’s far less than what it pays to other banks. It possibly needs to take a look at the locations of its ATMs to increase the footfalls. It can also explore whether it can charge on its ATM use. There are roughly 8 million ATM transactions a day and even if it charges Rs.1 per transaction, it can earn Rs.300 crore a year.

The biggest challenge before the bank, at this point, is monitoring its bad assets, about 60% of which originate from mid-corporates and relatively large among the small and medium enterprises (SMEs), the companies which are not diversified, and another 25% from low-ticket accounts from retail, agriculture and small businesses. The bank must give up its traditional model of focusing on manual supervision which is almost impossible when one needs to track millions of accounts. Apparently, sometime back it had set up an account tracking and monitoring platform, called AT@M, for real time monitoring of stressed accounts, but it has not been put to proper use. As a result, even in tractor loans, the bank’s NPAs are in double digits. The bad asset monitoring should be entirely technology driven, supported by modern models of call centres and field tracking.

Finally, the employees should be incentivized to take decisions. Currently, about 70% of SBI’s 220,000 employees are backroom staff and only 30% face customers. This order must be reversed. In a modern bank, up to three-fourths of the employees are expected to be on the frontline. That will help the bank increase its business and income, both interest and fees.

Note: This story has been updated from its original version to clarify the roles of the bank’s managing directors.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank